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Court of Appeal Takes Notice of Notice Provisions

Court of Appeal Takes Notice of Notice Provisions

Regional Capabilities:

September 12, 2012

In ENER-G Holdings Plc v. Hormell1, the Court of Appeal upheld
a decision that a claimant had served a warranty claim worth almost
£2 million out of time under contractual limitation provisions. The
case offers lessons for both those drafting contracts and
litigators wishing to preserve rights.

The facts

ENER-G and Mr Hormell entered into a sale and purchase agreement
(SPA) for the sale of shares. After completion, ENER-G identified
warranty claims against Mr Hormell for nearly £2 million. The
question for the court was whether ENER-G had served its claim in
time under the SPA.

The SPA required ENER-G to give written notice of any warranty
claim by the “second anniversary of completion”. This meant on or
before 2 April 2010. Even if ENER-G gave notice in time, any claim
would lapse unless it also issued and served a claim form “not
later than the expiry of the period of twelve months after the date
of the notice”.

Clause 13.2 of the SPA stated that any notice “may be served by
delivering it personally or by sending it by pre-paid recorded
delivery post [to the relevant party's designated address]”. Clause
13.3 deemed a personally delivered notice served on the business
day on which it was delivered and a notice sent by pre-paid
recorded delivery served two business days after posting. The SPA
also stated2 the claim form
could be served by the methods specified in clause 13.3 or by any
manner allowed by law.

A process server left the necessary notice (the first notice) in
the porch of Mr Hormell’s farmhouse on 30 March 2010. Mr Hormell
was not home at the time. However, he found and read the notice
before 5pm that day. A second copy of the notice (the second
notice) was sent to Mr Hormell by recorded delivery the same day.
Almost one year later, on 29 March 2011, a process server left the
claim form in the letter box that served the farmhouse. Mr Hormell
was away and did not open the letter box, or see the claim form,
until 2 April 2011.

The arguments

Mr Hormell argued that ENER-G’s claim form was served out of
time. This was because ENER-G had validly served the first notice
on 30 March 2010. Although it was not served by “delivering it
personally”, this did not matter as clause 13.2 did not set out an
exclusive code. Therefore, ENER-G had to serve the claim form
within 12 months, i.e. by 30 March 2011. Although the claim form
was left at the farmhouse on 29 March 2012, this was out of time as
rule 6.14 of the Civil Procedure Rules (CPR) deems a claim form
served two business days after being left at the relevant place.
ENER-G advanced two principal arguments why its claim form was
served in time:

It validly served the first notice, and the claim form, by
“delivering [them] personally” to the farmhouse. It did not matter
that the process server had not handed either document to Mr
Hormell. Each document was served when left at the farmhouse, i.e.
on 30 March 2010 for the notice and 29 March 2011 for the claim
form, and therefore within the 12-month deadline.

Alternatively, ENER-G argued its first notice was invalid
because it was not served on Mr Hormell personally in strict
compliance with clause 13.2. But ENER-G’s second notice was valid
and deemed served on 1 April 2010 under the SPA. That meant the
claim form was also in time when deemed served on 31 March 2012
under the CPR. To succeed on this argument, ENER-G had to argue
that clause 13.2 was exclusive and not permissive; therefore the
first notice was not valid when it was left at the farmhouse.

“delivering it personally”

All members of the Court of Appeal rejected ENER-G’s first
argument that the notice and claim form had been served by
“delivering [them] personally”. Although individual process agents
had delivered each document, that was not enough to satisfy the
SPA. The SPA had to be read as demanding personal service and,
therefore to be effective, the documents would have had to have
been handed to Mr Hormell in the usual way. Neuberger MR made the
point that the identity of the individual delivering the documents
is largely immaterial. This reading was also consistent with an
earlier Court of Appeal decision on a similar provision3.

Was clause 13.2 exclusive or permissive?

The majority of the Court of Appeal (Neuberger MR and Gross LJ)
agreed with the judge at first instance that the methods of service
permitted by clause 13.2 were not exclusive. On that basis, ENER-G
had validly served the first notice on 30 March 2010 despite the
fact that it had not been served by “delivering it personally”. The
first notice was delivered when Mr Hormell read it. Longmore LJ
dissented on this point.

The majority put emphasis on the fact clause 13.2 stated that
“any such notice may be served” (emphasis added). They
read the two forms of service the clause prescribed as providing
the safest (but not the only) way to effect service. If served in
another way, the server retained the risk that the recipient might
never receive the notice.

In contrast, Longmore LJ was troubled by the fact that clause
13.2 specified two forms of service. He thought that it made little
sense to specify particular forms of service if the clause was to
be read permissively. He also noted the clause dealing with service
of the claim form stated that it could be “served in any other
manner allowed by law”. There was no such saving provision in
clause 13.2. He went on to note that the contrary view:

“produces the rather more perverse
consequences that the actual method of service which was not
contractual (because not served on the defendant personally)
effectively became a contractual method once it has come to the
notice of the defendant and operates as a trigger for the second
period […] at a time of which the claimant cannot be aware, with
the result that his claim is unexpectedly barred.”

Lessons learned

Parties often assume that the courts
will be slow to strike down substantive claims based on perceived
technicalities relating to notice and time limits. But this case is
a clear illustration that the Court of Appeal has not lost sight of
the need to ensure certainty. Gross LJ quoted Lord Nicholls4 on this point: “Inherent in a
time limit is the notion that the parties are drawing a line. Once
the line is crossed, a miss is as good as a mile.”

This case illustrates, once again,
the dangers of using language that is similar, but not identical,
to the language of established regimes (such as the rules of
court). All members of the Court of Appeal accepted that the
reference to “delivering it personally” in the SPA required
personal service of the notice. It is far from clear that this is
what the draftsman had actually intended. (Clause 13.2 required
that notice be served personally at the farmhouse, which the court
acknowledged was difficult to reconcile with its reading.) At the
very least, the expense of arguing the point could have been
avoided by refinement of the drafting.

Whenever a contract requires personal
service (or personal delivery - this case suggests the courts will
usually interpret this as the same thing), you should ensure you
effect service by handing the relevant documents to the required
recipient in person.

It will reduce complexity to set out
any contractual timetable by reference to a fixed start or finish
date (rather than uncertain interim steps). ENER-G could have
avoided many difficulties if the SPA had stated that it had to
serve the claim form by the third anniversary of completion.

In contrast, calculating contractual
time limits by reference to separate triggering events has inherent
risks. If the ultimate time limit is critical (as it was in this
case), then it is prudent to assume that earlier arguable points
will go against the party seeking to serve. ENER-G no doubt now
regrets that, having given notice of its warranty claim, it left it
to the last minute to serve its claim form.

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